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Gold hits record near $1,500 after US outlook

London, April 18, 2011

Gold prices rallied to record highs near $1,500 an ounce on Monday after rating agency Standard & Poor's cut its outlook for the United States to negative from stable, boosting safe-haven flows into the metal.

S&P cited a "material risk" that policymakers may not agree on a plan to trim the US budget deficit.

Spot gold rose as high as $1,497.20 an ounce and was bid at $1,492.25 an ounce at 1358 GMT, against $1,483.75 late in New York on Friday. US gold futures for June delivery rose $7.60 an ounce to $1,493.60, off a record $1,498.60.

The cut rattled the dollar, which pared its earlier hefty gains versus the euro, while U.S. Treasury debt turned negative.

The news added to upward pressure on gold, which had already hit record highs in Asian trade. The metal later retreated as increased talk that Greece would be forced to restructure its debt and uncertainty over a bailout for Portugal hurt the euro.

Consequent gains in the dollar put the brakes on gold's rise, though flows into the metal as a result of the crisis limited losses.

"The debt crisis in the euro zone is capping the euro but is also an argument (to buy) gold as a safe haven," said Peter Fertig, a consultant at Quantitative Commodity Research.

"If the debt crisis should calm down, interest rate spreads argue for a stronger euro, which would also be a positive factor for gold. From that perspective, gold appears to be well supported."

Other assets also slipped after the S&P cut in ratings outlook, with stock markets tumbling in Europe and the United States, oil extending losses and industrial metals such as copper falling.

"The US debt situation got a reality check this morning from the move by S&P," said John Kilduff, a partner at Again Capital in New York.

"Only precious metals will be seen as attractive in the aftermath of the outlook downgrade. The overall economic outlook becomes more opaque with this; equities and energies will be very much under pressure now."

Crude oil remained near multi-year highs, however, supported by unrest in the Middle East and North Africa.

Elevated oil prices tend to support gold, which is often seen as a hedge against oil-led inflation.

"Gold prices are more sensitive to commodity price movements than to broader inflation," said HSBC analyst James Steel in a note. "The recent gains in inflation across the OECD and emerging world are in those categories -- food and fuel -- that gold is most likely to react positively to."

Gold also benefited in earlier trade from fresh concerns over inflation in emerging markets. China raised banks' required reserves on Sunday for the fourth time this year, extending the fight against stubbornly high inflation.

"(There was) another increase in the Chinese reserve requirement ratio over the weekend," said RBS analyst Daniel Major. "It certainly looks as though there are signs that inflation is uncomfortably high within the Asia region.

Among other precious metals, silver was bid at $43.11 an ounce against $42.99, having earlier touched a new 31-year high at $43.51 an ounce. Silver has been the best-performing precious metal so far this year, up 40 percent since January.

However, analysts say the metal, which has benefited from strong investment flows and perceptions that recovering industrial demand will put a floor in prices, may be overpriced at current levels. - Reuters